What is gap insurance and how does it work?
Everyone knows that cars depreciate quickly. When you file a comprehensive or collision claim, the insurance company pays the vehicle’s ACV in the event of a total loss. However, the compensation you receive may be less than what you owe on your car loan or lease.[1] In these situations, it’s up to you to make up the difference.
With gap insurance, the insurer covers the difference between the car’s value and what you owe. Without it, you’d have to keep making monthly payments on a vehicle you no longer own or pay off the loan or lease in a lump sum.
What gap insurance covers in Arkansas
Gap insurance policies can help prevent out-of-pocket expenses after a total loss or theft. They can also protect you from rolling negative equity into your next auto loan or lease.
Here’s an example of how gap insurance works.
Say you buy a car for $45,000. A year later, you’re in an accident and the insurance company declares it a total loss. The ACV of the vehicle is $37,000 at the time of the accident. However, you still owe $41,000 on your auto loan.
In this case, your insurer would cut the lender a check for $37,000 — minus your deductible — under your collision coverage.[2] If you have gap insurance, it will cover the $4,000 you owe to the lender. If you don’t have gap coverage, you must pay the difference yourself.
Important Information
Gap insurance doesn’t cover vehicle repairs, mechanical issues, or injuries from an accident. It also doesn’t typically cover your comprehensive and collision deductible, although there may be exceptions.
Gap insurance vs. full coverage
Full coverage includes a combination of liability, collision, and comprehensive coverages. It doesn’t include gap insurance.
Liability insurance covers your responsibility to others if you’re at fault in an accident.[3]
Comprehensive and collision coverages pay out the fair market value of the vehicle if a total loss or theft occurs. But full coverage doesn’t pay the difference if you owe more than your car is worth. Adding gap insurance provides an additional layer of protection if you have an auto loan or lease.